I've been making an effort lately to understand more about so-called "Modern Monetary Theory" (MMT). There's been an uptick in the use of "MMT Welfare State" and "People's QE" talking points from well-meaning but naive progressives that's making me anxious, for reasons I'll get to in the final section of this blog. I've watched a bunch of interviews with and lectures by Dr Stephanie Kelton (Bernie's Chief Economic Advisor), as well as dived into the blog of Australian economist Bill Mitchell, and in all honesty found that there's not much in what they say I disagree with. What concerns me more is what they don't say, and the policy lessons that others are drawing from MMT with their tacit encouragement.
What's good isn't original and what's original isn't very good
Let's start with what the MMT theorists get right, and that's their understanding of public finance and the role it plays in the economy. MMT proponents understand, in a way that neoclassical economists often elide or obfuscate, that the state is the consumer, producer and investor of last resort . Taxation and redistribution are not arbitrary and selfish activities undertaken by a rapacious bureaucracy, but necessary tasks to: compensate for insufficient or 'leaky' demand in the economy; guarantee social and economic rights; manage foreign trade; and address the dilemma of declining profits under capitalism and the paradox of thrift.
MMT gets this right, of course, because it's a simple restatement of basic left economics. In general terms, competitive economic activity is characterised by a multiplicity of dilemmas of interdependence, which produce collective action problems for society as a whole. Taxation is an institutional solution to these problems which redistributes surplus profits to support demand-side consumption by those who are left behind by the competitive market. The government performs other essential institutional roles by regulating trade, supporting long-term investment in R&D and infrastructure and funding basic services that cannot be provided through self-help. Unlike classical economists, Keynesians and MMT proponents all accept that market failures are an endemic and permanent feature of competitive economic systems that require the existence of strong public institutions to correct.
The chief motivating interest of modern monetary theorists is to counteract the right-wing talking point that government spending and deficits are harmful to the economy. They do this very well: governments which run a deficit are trading on their institutional reputation to pump extra funds into the private economy in much the same way that banks loan against the trusted value of real property to increase home ownership rates. But you don't need MMT to fight back against austerity and deficits hawks: any heterodox economic perspective will get you to that point. Which is why orthodox Keynesians consider MMT proponents to be radicals: they're not just interested in finance, but in the role of monetary policy in supporting public spending, a topic which most economists on both right and left treat with the utmost caution.
The meat of MMT, therefore, lies in its account of the monetary system and the way in which currency is created and employed. While disconcerting for most people (and many economists!), there's little to disagree with in the MMT description of how Central Banks establish the value of currency through the purchase and redemption of government debt and the regulation of fractional reserve banking. MMT presents itself as a revival of German "Chartalist" ideas in which the value of money is set by laws and institutions. They often mix this account with the paranoid right-libertarian version of the same narrative, in which money is given its value through the state's monopoly on the use of violence and the coercive imposition of taxes to create debt. These narratives are uncontroversial, if incomplete. We've lived in a world of fiat money backed by trust in state institutions since the 1970s, and it works just fine.
From a cultural evolutionary perspective, it's absolutely true that both the reputation of institutions and violent coercion can be used as mechanisms to generate compliance with a social norm (the value of money being essentially, a shared belief or practice). But institutions and punishments are not the only ways in which social order is established and maintained. MMT proponents are dismissive of the neoclassical exchange theory of value: that money obtains utility becuase it's an efficient shared unit of exchange and account. But as I write in Chapter II of my book, "Politics for the New Dark Age", the neoclassical account of exchange value as the product of intersubjective belief and social learning is essentially correct (once we adjust for structural inequalities). Although a powerful hegemon can establish the 'rules of the road' for the economy, the continuing utility of norms can be and is in fact supported by a combination of different social mechanisms including the tacit consent of citizens.
And by dismissing this part of the picture, MMT proponents start to get things wrong. Because the value of money is mutually constructed by both the requirement of the state that debts be redeemable in its currency and the tacit consent of its citizens that fiat currency is a useful medium of exchange and unit of account, then the capacity of the state to spend by simply issuing currency is not unlimited, not even theoretically. A state *could* dictate the value of its currency using only coercion, but that would be a radically different governance regime to the liberal democracies we prefer to rule us. The Levy Institute, for example, advocates for capital controls typically employed by the very same fixed-exchange rate autocracies they purport to critique! Institutional trust in government and the state's power to coerce compliance are not unconstrained, and therefore the government's capacity to issue currency in pursuit of its policy aims is not unlimited in the way MMT suggests.
MMT economists are extremely adept at arguing that the progressive economic policy space is wider than that alloted to the state under neoliberalism. And as a description of the financial and monetary systems, MMT has much to teach lay economists. But MMT proponents are often guilty, I fear, of validating Hume's dictum that human reasoning slips too readily from describing what 'is' to prescribing what 'ought' to be.
Big Asterisks
The common criticism of MMT is that it while it describes fiscal and monetary systems well, it underplays the complex interactions between them. Kelton and Mitchell, at least, are very open about the caveats they place on their work. But even so, these are pretty big fucking caveats. Inflation is the main issue lurking beneath the surface, and it's a problem that MMT theorists are far too glib about given how poorly it's understood. It's easy to argue that spending which increases productivity doesn't necessarily increase inflation (because the increase in the value of money in circulation is ideally being offset by an increase in the value of goods being produced). Although the right would no doubt disagree, in a demand-constrained economy like the current moment progressives can demonstrate that more spending on consumption will boost growth whereas further austerity will only choke it off. But the relationships between money, productivity and inflation are highly complex and non-linear, to say the least.
Problems arise when monetary policy is employed on the assumption that there's a strict correlation between spending and economic activity ("Overt Monetary Financing"). If Central Banks are expected to support fiscal expansion (e.g. through the purchase of government bonds that private savers are unable or unwilling to absorb through open market operations), they risk exogenously devaluing the currency. Money supply is not the only factor leading to inflation, of course, but increasing the availability of any commodity does put downwards pressure on its value. Devaluing currencies drives up prices and corrodes the value of savings, which may counteract the domestic consumption and production effects one is trying to achieve through fiscal expansion (For Mitchell's counterargument on this, see: here) There's a reason the conventional policy view, a view I support in the absence of compelling evidence to the contrary, is to keep inflation low and the money supply conservative.
The flip side of preventing inflation is ensuring that the supply of money remains meaningfully linked to the resources of the real economy. As Kelton herself says in one of the clips linked at the top of this piece, it's trivial for the government to give everyone money in their bank account. The more important problem is making sure there are goods and services that people can buy with those funds. That problem is definitely *not* trivial and it cannot be hand waved away - I've read MMT proponents go so far as to say that government spending is fully independent of the real economy. Production is not motivated solely by the macro-availability of money for production and consumption, but at the micro level by the rate of profit and the demand for consumption (this is the perspective I outline in Chapter XIII of my book).
In a market economy it won't matter if the funds to produce and consume necessary goods and services are available if the owners of capital and labour (i.e. workers) cannot be incentivised to produce them. If the rate of profit is low, capitalists have plenty of other things they would rather do with their wealth (i.e. investing overseas, buying into asset bubbles, rent-seek by privatising public assets etc.) than produce goods and services. And if demand for additional consumption is low (because government-supplied 'wages' are high), workers have little motivation to commit their time to perform additional labour. I'm not saying that fundamentally changing our economy to be less reliant on the profit motive and wage labour is a bad thing, only that leaning on MMT to advance these goals without tackling the bigger structural forces at work under capitalism is likely to be extremely counterproductive.
MMT proponents offer easy solutions for hard problems. They correctly understand the state as a social mechanism for redistribution of wins and losses but don't engage directly with the political question of "who pays" and "who benefits". Distributional justice is the essence of political conflict, and by arguing that it doesn't matter (because the government’s fiscal resources are not scarce), MMT proponents are making a fundamental tactical and strategic mistake.
Back to the future
I'm anxious about MMT economics rising to prominence on the left because the "MMT welfare state" that some evangelists have proposed looks to me like a fiat money version of 1960s Keynesianism or a demand-side version of post-GFC quantitative easing. If policy-makers are complacent about the critical role of public trust in money and the risk of inflation, there's considerable risk that progressives could walk headlong into a replay of stagflation and the liquidity trap - both of which dramatically worsened inequality We do not want to repeat on the demand-side the collossal failure and waste of supply-side QE, just because those we aim to help are more 'deserving'. MMT gets the diagnosis right, but the cure wrong.
Another analogy: MMT social welfare states would look a hell of a lot like the oil-fuelled “socialism” of Venezuela. The resemblence should give anyone caution: the government in Caracas believed it had a quasi-unlimited store of exogenous wealth which it could use to create a welfare state without fundamentally taking on the institutional power of existing elites or reforming the structure of the economy. But of course the economy was more sensitive to international financial markets and the trust of people in its currency than it suspected. The result? For all its good intentions, the Bolivarian Republic is suffering currency depreciation, inflation, the corroding of normal economic production, increased repression and violent political instability.
There is no short-cut to economic equality: it must be built, step-by-step and by imposing direct costs on the wealth and privilege of those at the top of society. We must not only work to redistribute wealth and income, but to build a production system that does not generate belle epoque-levels of inequality in the first place. By all means, progressive governments should spend more, and worry less about the concern trolling of the deficit hawks. And to balance the books? Raise taxes, especially on the rich. Tax capital aggressively and abolish sweet-heart deals for the influential. Such a programme is going to make enemies, and create losers who will use their considerable resources to fight against us. But that's the kind of hard work politics is for: not throwing clever economics against hard problems.